When Crescent University City Venture, LLC v. Trussway Manufacturing, Inc., 376 N.C. 54, 852 S.E.2d 98 (2020) was released in December 2020, the decision left some ambiguity about the scope of its intended reach. On the one hand, the North Carolina Supreme Court in Crescent reiterated that the purpose of the economic loss rule was to “prevent contract law from drowning in a sea of tort;” that the rule bars recovery in tort for the simple failure of a defendant to perform its contract; and that where a plaintiff has a bargained-for remedy, it must look solely to contract law when seeking recovery for purely economic losses. On the other hand, the Court more broadly concluded that “North Carolina’s state courts have consistently applied the economic loss rule to hold that purely economic losses are not recoverable under tort law, particularly in the context of commercial transactions.” That language arguably suggests a potentially more expansive application of the economic loss rule, one not dependent upon the existence or non-existence of a bargained-for exchange between the adversaries.

In the eighteen months since Crescent was released, however, a trio of decisions of interest to the construction industry — one published state-court appellate case, and two unpublished federal district court cases — suggests that the courts are embracing a more narrow interpretation of Crescent and honing their focus on whether a contractual remedy exists when evaluating application of the economic loss rule.

In Cummings v. Carroll, 379 N.C. 347, 2021-NCSC-147, the buyers of a beach house sued the sellers and their real estate agents in fraud, negligence, and other claims related to structural damage discovered post-purchase but arising from water intrusion events that had occurred pre-purchase. The trial court granted summary judgment in favor of defendants on all counts, but a divided Court of Appeals panel reversed. In rejecting the defendants’ economic loss rule defense, the Supreme Court of North Carolina distinguished Crescent as arising “in the context of a large commercial real estate transaction in which the rights and responsibilities of the parties were comprehensively controlled by a series of inter-related contracts and sub-subcontracts.” The Court concluded that a disclosure statement containing representations relied upon by the buyers in support of their tort claims had not been incorporated by reference into the underlying purchase contract, and therefore could not serve as the basis for application of the economic loss rule in favor of the sellers. The Court also concluded that the absence of any contractual privity between the buyers and the sellers’ real estate agents precluded application of the economic loss rule as to those defendants.

In New Dunn Hotel, LLC v. K2M Design, Inc., No. 5:20-CV-107-FL, 2021 WL 1910033 (E.D.N.C. May 12, 2021), a hotel owner sought recovery in negligence against an architect whose drawings and specifications failed to garner City of Dunn approval during the permit review process. The hotel owner and the architect had no contractual privity; instead, the operator of the hotel, a co-plaintiff in the case, had entered into the design contract with the architect. In rejecting the architect’s economic loss rule defense at the motion to dismiss stage, the U.S. District Court for the Eastern District of North Carolina, the Honorable Louise W. Flanagan presiding, emphasized that the hotel owner never made any contract with the architect or otherwise allocated the risk of loss with the architect; concluded that Crescent had applied the economic loss rule to a plaintiff who had a basis for recovery in contract; and held that since the hotel owner lacked a basis for recovery in contract or warranty against the architect, the economic loss rule was inapplicable to its negligence claim.

In Walbridge Aldinger LLC v. Cape Fear Engineering, Inc., No. 7:21-CV-57-FL, 2022 WL 288181 (E.D.N.C. Jan. 31, 2022), Judge Flanagan again adopted a limited reading of Crescent. The general contractor in Walbridge Aldinger had hired a surveying company to perform piling staking services. In performing its services, the surveying company relied upon certain plans prepared by an engineering company. One of the notes contained in those plans stated that elevation 100’-0” corresponded to mean sea level 103.5’. The surveying company, however, did not take that note into account when performing its surveying services, resulting ultimately in 160 piles being installed three- and-a-half feet too low. In response to the general contractor’s suit against it, the surveying company third-party complained against the engineering company in negligence, alleging, among other things, that the elevation note on its plans was not sufficiently conspicuous. At the motion to dismiss stage, Judge Flanagan refused to apply the economic loss rule to the surveying company’s negligence claim, concluding that the third-party complaint did not allege the existence of a contract between the surveying and engineering companies and citing her prior decision in the New Dunn Hotel case.

At the moment, then, it appears that when courts are confronted with application of the economic loss rule to tort claims arising from design and construction disputes, the touchstone for their analysis is the existence or non-existence of a bargained-for remedy between the litigants. Future decisions could modify this assessment, however, so watch this space.

July 12, 2022/by Construction